INTERNATIONAL BUSINESS; A Political Dispute Puts a City in the Dark

By TODD BENSON

Published: April 12, 2005

Looking to increase its cash flow in Brazil, the American energy giant, the AES Corporation, has been busy doing what power distributors everywhere do when customers fail to pay their bills: pulling the plug. But when it cut the lights recently at 85 buildings owned by the city government of S?Paulo, it was dragged into the middle of an ugly political fight.

Eletropaulo, AES's main Brazilian unit and Latin America's biggest power distributor, claims that the city owes it 636 million reais (about $246.1 million) in unpaid bills -- more than 100 times Eletropaulo's net profit in 2004.

Though almost all that debt was incurred by previous governments, dating back to 1996, Eletropaulo's decision to cut off power to the city, South America's biggest, came just three months after a new mayor took office, setting off a public outcry from city officials who argued that the move was politically motivated.

The showdown has important implications for AES, which has poured almost 2 billion reais (about $774 million) into Eletropaulo since it was privatized in 1998 and plans to invest an additional 428 million reais (about $165.6 million) in the company this year. AES, which is based in Arlington, Va., gets about a quarter of its worldwide revenue from Brazil, more than it gets from North America. S?Paulo's city government is by far both Eletropaulo's biggest customer and debtor, accounting for 2.5 percent of the company's monthly revenue.

''Eletropaulo needs to cut down on fraud and nonpaying customers to become more profitable,'' said Renato Pinto, an energy analyst at Fator Corretora, a S?Paulo brokerage firm.

''In that sense, they're right to cut off clients who don't pay,'' he continued. ''But when you're dealing with an entity like City Hall that serves the general public, I'm not so sure that this is the best way to resolve the problem.''

At the heart of the dispute is a political tug of war between the city's new mayor, Jos?erra, of the Social Democratic Party, and his predecessor, Marta Suplicy, a member of President Luiz In?o Lula da Silva's Workers' Party. Mr. Serra, who ran for president in 2002 and lost to Mr. da Silva, says he inherited a city on the verge of bankruptcy with about 8 billion reais (about $3 billion) in short-term debt owed to array of utilities, construction companies, employees and even the federal government.

He has also accused Ms. Suplicy's administration of violating a federal fiscal responsibility law by not leaving enough money in the city's coffers to cover upcoming debt payments, something Ms. Suplicy has angrily denied.

To clean up the city's finances, Mr. Serra has imposed draconian budget cuts and ordered that outstanding debts with utility companies like Eletropaulo and several other service providers be audited by the city officials -- a move that was widely viewed as an attempt to force the companies into renegotiating existing contracts.

Mr. Serra is used to playing hardball with big multinational corporations. When he was Brazil's health minister from 1998 to 2002, when Fernando Henrique Cardoso was president, he forced pharmaceutical companies to lower prices on AIDS drugs by threatening to break patents.

Eletropaulo executives say they are willing to negotiate a payment plan for the city, which they claim has not paid its electricity bill since last October, when Ms. Suplicy was still mayor. But, executives said, when the company's requests to meet with Mr. Serra's economic team went unanswered, it decided to cut the power at city buildings as a way of prodding city officials to the negotiating table.

''We were left with no alternative,'' said Roberto Di Nardo, Eletropaulo's vice president. ''We have an obligation to our shareholders to preserve the economic health of the company.''

Within hours, the city won a court injunction ordering Eletropaulo to turn the lights back on. But Mr. Serra seized on the incident to ratchet up the war of words with Ms. Suplicy and the Workers' Party, saying that her administration had been treated more leniently by Eletropaulo for political reasons. He also suggested that Brazil's national development bank, B.N.D.E.S., which is controlled by the federal government and has a 49 percent stake in Eletropaulo, may have tacitly nudged the company into taking a harder line with his administration.

''They couldn't take any measures against the previous administration for political reasons, because they were saved by B.N.D.E.S.,'' Mr. Serra told reporters. ''So they came and did this during our administration.''

The mayor was referring to Eletropaulo's own debt problems, which almost prompted the government to renationalize the company two years ago. At the time, Eletropaulo was still reeling after the government imposed power rationing, and had defaulted on part of the $1.2 billion that AES borrowed from the development bank to buy Eletropaulo in 1998. In the end, though, the bank agreed to a generous debt restructuring that allowed AES to retain a 51 percent majority control of Eletropaulo.

Though AES is still one of the development bank's biggest borrowers, with some $445 million in debt, the bank's president, Guido Mantega, insisted that it has no say in how Eletropaulo is run.

''B.N.D.E.S. is a minority shareholder in Eletropaulo,'' Mr. Mantega said in a radio interview last week. ''It doesn't get involved in how the company is managed. It didn't in the past and it doesn't now. All the decisions are made by Eletropaulo's management.''

Frustrated at what he sees as a lack of good faith on the city's behalf to negotiate a deal, Mr. Di Nardo said Eletropaulo was appealing the court ruling that forced it to restore power. He also said that Eletropaulo was prepared to cut the lights again if the city did not pay. Mr. Serra has said the city will sue the company for damages if Eletropaulo turns off the power again.

But even as the threat of another blackout looms, the city does not appear to be in a rush to settle the matter.

''We're not going to default,'' said Mauro Ricardo Machado Costa, the city's finance secretary. ''But we need to audit the numbers to make sure they are correct. Then, we'll negotiate a payment schedule.''

Photo: Workers at a health agency in São Paulo, Brazil, had to use a flashlight to help a patient after the power company, a unit of the American energy giant AES, cut electricity because the city was behind in its bills. (Photo by Tiago Queiroz/Agencia Estada, for The New York Times)